BDC Buzz has offered his view on BDCs in 2016 in his recently published "Total Returns For BDCs In 2016 And General Market Update" - and I wanted to provide my slightly contrasting view. We follow and prioritize different metrics.
In this article, I will show some of the key 2016 BDC metrics and show you the parsing of those numbers based on multiple metrics. I will start with my year to date spreadsheet:
Yield in the spreadsheet below is based on the Q4-16 'regular' dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; NAV = Net Asset Value; YTD = year to date. The dividend to EPS ratio is a measure of dividend safety. Due to calendar and fiscal years failing to overlap, I also include a dividend to the sum of the last four quarters of NII - in the Div/NIIltm column. After the Price/NAV ratio, the next column displays the percent change in price YTD. The next display price change plus YTD dividends accrued on the payment date - not the earned date. For the last four columns - the first measures the percentage change in the 2016 EPS projection since the beginning of the year; the second measures the change in the price target since the beginning of the year; the third measures the change in the Q4-16 dividend from the Q4-15 dividend; and the last measures the change in NAV between Q3-16 and Q3-15. Special dividends are not included in this data. ARCC, FDUS, MAIN and TCPC have paid special dividends on a near regular schedule. FULL has converted to Great Elm Capital Corp and trades as GECC. On 8-05 AINV cut its dividend from $0.20 to $0.15/quarter. On 8-09 MCC cuts its dividend from $0.30 to $0.22/quarter. On 9-22 CPTA announced a 17% cut in its dividend to $0.13/month. On 11-02 HRZN cut its dividend from $0.34 to $0.30/share. On 11-09 TCRD cut its dividend to $0.27/share from $0.34. On 11-09 CMFN announced a Q1-17 cut in its dividend to $0.25 from $0.35. On 11-09 GARS cut its Q4 dividend to $0.28 from $0.35. On 11-21 PNNT cut its Q1 dividend to $0.18 from $0.28. On 12-08 OHAI cut its dividend in half to $0.06. I have temporarily encoded these Q1 cuts as the Q4 dividend. On 12-14 KCAP reduced its dividend to $0.12 from $0.15.
|Share Price||Div/||Div/||Div/||Div/||Q3-16||Price||YTD Percent Change||LTM %||LTM %||Last3yr||Last 3Yr|
|Alcentra Capital Corporation||(NASDAQ:ABDC)||11.60||11.97||11.36||87.2||91.3||88.2||9.9||13.69||0.87||3.19||14.91||9.09||-8.20||0.00||-8.24||na||na|
|American Capital Senior Floating||(NASDAQ:ACSF)||9.83||11.90||9.75||92.8||99.1||96.5||8.8||13.20||0.90||21.06||32.86||1.63||-6.69||0.00||-2.44||na||na|
|Apollo Investment Corporation||(NASDAQ:AINV)||5.22||5.86||10.24||71.4||90.9||81.2||8.6||6.95||0.84||12.26||23.75||0.00||-14.37||-25.00||-11.24||-25.00||-15.44|
|Ares Capital Corporation||(NASDAQ:ARCC)||14.25||16.49||9.22||96.8||94.4||94.0||9.2||16.59||0.99||15.72||26.39||-1.26||-5.28||0.00||-1.19||0.00||2.53|
|BlackRock Capital Investment||(NASDAQ:BKCC)||9.40||6.96||12.07||102.4||97.7||86.7||10.0||8.38||0.83||-25.96||-17.02||-18.81||-26.25||0.00||-21.39||-19.23||-2.56|
|CM Finance Inc||(NASDAQ:CMFN)||10.02||9.30||10.75||68.5||85.5||71.8||8.4||11.86||0.78||-7.19||2.79||15.87||-26.67||-27.95||-13.11||na||na|
|Capitala Finance Corp.||(NASDAQ:CPTA)||12.08||12.93||12.06||86.7||96.9||83.0||9.9||15.68||0.82||7.04||19.95||-6.25||-16.00||-17.02||-13.08||-17.02||Infinity|
|Fidus Investment Corporation||(NASDAQ:FDUS)||13.69||15.73||9.92||108.3||96.3||103.2||10.0||15.58||1.01||14.90||26.30||-13.77||-0.87||0.00||3.04||2.63||-3.36|
|Fifth Street Finance Corp.||(FSC)||6.38||5.37||13.41||100.0||96.0||101.8||9.0||7.97||0.67||-15.83||-4.55||-6.49||-23.67||0.00||-11.44||-37.37||-17.68|
|Fifth Street Senior Floating Rate||(FSFR)||8.57||8.71||10.33||101.1||98.9||104.9||8.1||11.06||0.79||1.63||12.14||-10.10||-6.86||0.00||-8.67||12.50||Infinity|
|Franklin Square Investment Corp||(NYSE:FSIC)||8.99||10.30||8.66||101.4||102.5||102.3||9.5||9.42||1.09||14.57||24.49||-12.00||-9.52||0.00||-2.28||na||na|
|Full Circle Capital Corporation||(FULL)||2.47||2.67||15.73||120.0||85.7||121.8||11.7||3.59||0.74||8.10||25.10||-16.67||2.18||0.00||-10.25||-54.55||-55.18|
|Gladstone Investment Corporation||(NASDAQ:GAIN)||7.67||8.46||8.87||100.0||100.0||106.9||7.8||9.65||0.88||10.30||20.08||4.17||6.06||0.00||6.63||25.00||14.42|
|Garrison Capital Inc.||(NASDAQ:GARS)||12.17||9.35||11.98||92.6||91.8||87.3||8.9||12.53||0.75||-23.17||-13.97||-22.93||-27.23||-20.00||-16.02||-20.00||-14.08|
|Golub Capital BDC, Inc.||(NASDAQ:GBDC)||16.63||18.39||6.96||100.8||97.7||102.4||8.0||15.96||1.15||10.58||18.28||-4.51||2.79||0.00||1.01||0.00||5.03|
|Gladstone Capital Corporation||(NASDAQ:GLAD)||7.31||9.39||8.95||98.8||97.7||100.0||9.7||8.62||1.09||28.45||39.95||1.19||-10.61||0.00||-4.86||0.00||-7.56|
|Goldman Sachs BDC||(NYSE:GSBD)||19.00||23.52||7.65||85.3||88.2||81.2||9.7||18.58||1.27||23.79||33.26||2.43||-4.74||0.00||-4.52||na||na|
|Harvest Capital Credit||(NASDAQ:HCAP)||11.73||13.75||9.82||95.7||94.4||76.9||9.8||13.75||1.00||17.22||28.73||-0.70||-3.39||0.00||-3.64||0.00||-7.68|
|Share Price||Div/||Div/||Div/||Div/||Q3-16||Price||YTD Percent Change||LTM||LTM||Last 3Yr||Last 3Yr|
|Horizon Technology Finance Corp||(NASDAQ:HRZN)||11.73||10.53||11.40||82.8||100.0||79.8||9.6||12.44||0.85||-10.23||-0.00||2.11||-13.56||-13.04||-10.76||-13.04||-10.88|
|Main Street Capital Corporation||(NYSE:MAIN)||29.08||36.77||6.04||99.6||96.5||99.8||10.3||21.62||1.70||26.44||34.08||-5.11||1.82||2.78||-0.78||15.62||12.77|
|Medley Capital Corporation||(NYSE:MCC)||7.52||7.51||11.72||91.7||107.3||91.1||9.3||9.49||0.79||-0.13||11.57||-21.95||-21.96||-26.67||-13.73||-40.54||-23.33|
|Monroe Capital Corporation||(NASDAQ:MRCC)||13.09||15.38||9.10||86.4||88.1||85.6||9.7||14.42||1.07||17.49||28.19||0.62||2.78||0.00||1.48||2.94||-1.89|
|New Mountain Finance Corp||(NYSE:NMFC)||13.02||14.10||9.65||100.0||98.6||97.3||10.2||13.28||1.06||8.29||18.74||-4.90||-5.00||0.00||-3.28||0.00||-7.55|
|OFS Capital Corporation||(NASDAQ:OFS)||11.48||13.76||9.88||97.8||91.3||89.7||9.3||14.67||0.94||19.86||31.71||-6.08||4.13||0.00||1.45||0.00||0.00|
|Oak Hill Advisors||(NASDAQ:OHAI)||3.80||1.73||13.87||64.9||55.8||55.5||5.2||4.61||0.38||-54.47||-48.16||-13.95||0.00||-50.00||-31.30||-62.50||-47.43|
|Prospect Capital Corporation||(NASDAQ:PSEC)||6.98||8.35||11.98||96.2||107.5||99.3||10.4||9.60||0.87||19.63||33.95||1.96||-15.36||0.00||-5.60||-24.48||-10.26|
|PennantPark Floating Rate Capital||(NASDAQ:PFLT)||11.25||14.11||8.08||111.8||99.1||111.5||8.1||14.06||1.00||25.42||35.56||0.99||-0.41||0.00||0.79||5.56||-1.65|
|PennantPark Investment Corp||(NASDAQ:PNNT)||6.18||7.66||9.40||72.7||83.7||73.0||8.0||9.05||0.85||23.95||35.60||-1.98||-8.14||-35.71||-7.84||-35.71||-14.29|
|Saratoga Investment Corp.||(NYSE:SAR)||15.42||20.61||7.96||63.1||77.0||89.5||7.3||22.39||0.92||33.66||44.29||33.33||-3.50||13.89||-0.13||na||na|
|Stellus Capital Investment||(NYSE:SCM)||9.64||12.06||11.28||100.0||100.0||104.8||10.0||13.57||0.89||25.10||39.21||2.26||-0.31||0.00||-0.37||0.44||-10.14|
|Solar Capital Ltd.||(NASDAQ:SLRC)||16.43||20.82||7.68||94.7||88.4||96.1||7.4||21.72||0.96||26.72||36.46||-2.87||2.55||0.00||0.93||0.00||-3.97|
|Solar Senior Capital Ltd.||(NASDAQ:SUNS)||14.90||16.44||8.58||92.8||99.3||99.0||8.4||16.78||0.98||10.34||19.80||7.80||0.79||0.00||-1.64||0.00||-8.16|
|Medallion Financial Corp.||(NASDAQ:MFIN)||7.04||3.02||6.62||26.7||36.4||11.4||1.7||11.61||0.26||-57.10||-54.26||-41.41||-40.26||-80.00||2.11||-78.26||12.19|
|Triangle Capital Corp||(NYSE:TCAP)||19.11||18.34||9.81||113.2||95.2||101.8||11.7||15.33||1.20||-4.03||5.39||-30.57||-8.52||-16.67||-0.97||-16.67||-5.12|
|TCP Capital Corp.||(NASDAQ:TCPC)||13.93||16.90||8.52||94.1||91.7||91.4||9.7||14.84||1.14||21.32||31.66||-6.71||0.71||0.00||-1.72||0.00||-1.34|
|THL Credit, Inc.||(NASDAQ:TCRD)||11.70||10.01||10.79||78.8||90.0||75.4||9.1||11.84||0.85||-14.44||-5.21||-2.14||-17.22||-20.59||-9.13||-20.59||-10.00|
|TICC Capital Corp.||(TICC)||6.08||6.61||17.55||252.2||227.5||336.0||16.4||7.08||0.93||8.72||27.80||-35.21||-31.25||0.00||-9.35||0.00||-32.92|
|TriplePoint Venture Growth||(NYSE:TPVG)||11.96||11.78||12.22||98.0||95.4||96.9||10.7||13.44||0.88||-1.51||10.54||-12.50||-23.88||0.00||-7.44||na||na|
|TPG Specialty Lending||(NYSE:TSLX)||16.22||18.68||8.35||86.7||88.6||86.9||9.9||15.78||1.18||15.17||24.78||7.14||0.93||0.00||1.02||na||na|
|With the 10 Treasury at 2.42% and sector average yield on Q4 dividends at 10.26% - the spread is 784 bps.|
|The cap weighted ETF BDCS has a price change of 11.88% year to date - with dividends its total return is 20.75%.|
|The SPY or S&P 500 EFT is 9.64% year to date. - and with unreinvested dividends is 11.87% year to date.|
The total returns vary from a total return gain of 44.29% to a total return loss of 54.26%. Many of the big losers were relatively small cap companies - which explains why my non-cap weighted turn numbers is smaller than the total return on the BDC exchange traded fund BDCS.
One can explain the wide variations on total return by observing the influence of key metrics on those returns. I will start with NAV or Net Asset Value change:
The Importance of NAV Growth in 2016 The following companies had NAVs that rose since Q3-15 - the NAV we had at the start of 2016: FDUS, GAIN, GBDC, MRCC, OFS, PFLT, SLRC and TSLX. Their mean price change since the beginning of 2016 is 17.56%. Their mean total return for the year is 27.67% - and 8 of the 8 beat the sector median yearly price change. Their mean Price/NAV ratio is 102.36 - their mean yield is 8.61% - and their mean Price/NII ratio is 11.58. Their mean Dividend/NII ratio is 98.31%. Their mean Q1-16 NII/TII ratio is 48.44%.
The following companies had shrinking NAVs of less than 6%: ACSF, ARCC, FSIC, GLAD, GSBD, HCAP, HTGC, MAIN, NMFC, PSEC, SAR, SCM, SUNS, TCAP and TCPC. Their mean price change since the beginning of 2016 is 18.49%. Their mean total return for the year is 29.25% - and 14 of the 15 beat the sector median yearly price change. Their mean Price/NAV ratio is 110.21 - their mean yield is 9.11% - and their mean Price/NII ratio is 10.67. Their mean Dividend/NII ratio is 95.26%. Their mean Q1-16 NII/TII ratio is 52.99%.
The following companies had shrinking NAVs of more than 6%: ABDC, AINV, BKCC, CMFN, CPTA, FSC, FSFR, FULL, GARS, HRZN, KCAP, MCC, OHAI, PNNT, TCRD, TICC, TPVG and WHF. Their mean price change since the beginning of 2016 is -4.68%. Their mean total return for the year is 6.84% - and 5 of the 18 beat the sector median yearly price change. Their mean Price/NAV ratio is 79.2 - their mean yield is 12.15% - and their mean Price/NII ratio is 7.92. Their mean Dividend/NII ratio is 97.87%. Their mean Q1-16 NII/TII ratio is 48.51%.
You are going to find the same kind of results on the other metrics that follow - it is more important to avoid the bad than it is to buy the good in 2016. A rising tide lifted all boats that merited a lift.
The Importance of Intra-Year EPS Projections The following companies had 2016 EPS projections that increased since the beginning of the year: ABDC, ACSF, CMFN, GAIN, GLAD, GSBD, HRZN, MRCC, PSEC, PFLT, SAR, SCM, SUNS, TSLX and WHF. Their mean price change for the year is 14.81%. Their mean total return for the year is 26.21% - and 11 of the 15 beat the sector median yearly price change. Their mean accuracy rating is 2.14. Their mean price target change is -6.16%. Their mean weighted average yield is 10.87%. Their mean LTM NAV change is -6.89%. Their mean LTM NII/TII ratio is 51.26%.
The following companies had 2016 EPS projections that have not changed since the beginning of the year: AINV. Its price change for the year is 12.26%. Its total return for the year is 27.59% - and 1 of the 1 beat the sector median yearly price change. Its accuracy rating is 2.5. Its price target change is -14.37%. Its yield is 11.00%. Its LTM NAV change is -11%. Its LTM NII/TII ratio is 50.62%.
The following companies had 2016 EPS projections that fell less than 4% since the beginning of the year: ARCC, HCAP, PNNT, SLRC and TCRD. Their mean price change for the year is 13.83%. Their mean total return for the year is 26.16% - and 4 of the 5 beat the sector median yearly price change. Their mean accuracy rating is 2.4. Their mean price target change is -6.3%. Their mean weighted average yield is 11.34%. Their mean LTM NAV change is -5.79%. Their mean LTM NII/TII ratio is 50.79%.
The following companies had 2016 EPS projections that fell more than 4% since the beginning of the year: BKCC, CPTA, FDUS, FSC, FSFR, FSIC, FULL, GARS, GBDC, HTGC, KCAP, MAIN, MCC, NMFC, OFS, OHAI, MFIN, TCAP, TCPC, TICC and TPVG. Their mean price change for the year is -1.30%. Their mean total return for the year is 11.08% - and 11 of the 21 beat the sector median yearly price change. Their mean accuracy rating is 3.38. Their mean price target change is -11.48%. Their mean weighted average yield is 11.24%. Their mean LTM NAV change is -9.98%. Their mean LTM NII/TII ratio is 51.65%.
There was not much of a difference between those BDCs with slightly falling earnings projections and those with rising projections. At the same time, it was important to avoid BDCs with significant falls in their projections.
The Importance of Dividend Changes The following companies had dividends that did not fall between Q4-15 and Q4-16: ABDC, ACSF, ARCC, BKCC, FDUS, FSC, FSFR, FSIC, FULL, GAIN, GBDC, GLAD, GSBD, HCAP, HTGC, MAIN, MRCC, NMFC, OFS, PSEC, PFLT, SAR, SCM, SLRC, SUNS, TCPC, TICC, TPVG, TSLX and WHF. Their mean price change for the year is 13.54%. Their mean total return for the year is 24.73% - and 24 of the 30 beat the sector median yearly price change.
The following companies had dividends that fell: AINV, CMFN, CPTA, GARS, HRZN, KCAP, MCC, OHAI, PNNT, MFIN, TCAP and TCRD. Their mean price change for the year is -10.81%. Their mean total return for the year is -1.08% - and 3 of the 12 beat the sector median yearly price change.
Some of the BDCs with falling dividends had such poor dividend coverage that the cuts were long expected. Three of those BDCs had more fear priced into them at the beginning of the year than was merited.
The Importance of Increases in Target Prices The following companies have had target prices that have risen or not changed since the first of the year: FULL, GAIN, GBDC, HTGC, MAIN, MRCC, OFS, OHAI, SLRC, SUNS, TCPC and TSLX. Their mean price change for the year is 10.63%. Their mean total return for the year is 20.66% - and 11 of the 12 beat the sector median yearly price change.
The following companies have had target prices that have fallen since the first of the year - but fallen less than 10%: ABDC, ACSF, ARCC, FDUS, FSFR, FSIC, GSBD, HCAP, NMFC, PFLT, PNNT, SAR, SCM and TCAP. Their mean price change for the year is 16.03%. Their mean total return for the year is 26.99% - and 11 of the 14 beat the sector median yearly price change.
The following companies have had target prices that have fallen more than 10% since the first of the year: AINV, BKCC, CMFN, CPTA, FSC, GARS, GLAD, HRZN, KCAP, MCC, PSEC, MFIN, TCRD, TICC, TPVG and WHF. Their mean price change for the year is -4.73%. Their mean total return for the year is 6.45% - and 5 of the 16 beat the sector median yearly price change.
Price targets fall when companies under perform on earnings expectations and NAV change. So there is a lot of redundancy in the underperforming groupings.
All this leads to the question "How do you avoid falling NAVs, falling earnings projections, falling dividends and falling price targets?" It takes a lot of data to prove the suggestions that follow - and I will leave the proof to a different article because the amount of data already provided is about as much as one should partake in one setting. But ... you avoid BDCs with falling NAVs by looking at the NAV trend. You avoid BDCs with falling earnings projections by looking at the historical earnings projection accuracy. You avoid BDCs with falling dividends by looking at dividend coverage. And if you have done those three things, you have predominantly avoided BDCs with falling price targets.
The data also suggest that one do one more thing. Pay attention to the BDCs portfolio weighted average yield, and have a diversified BDC portfolio that over weights BDCs with lower portfolio weighted average yields and also under weights BDCs with higher portfolio weighted average yields. Let's look at those numbers - with the BDCs that had dividend cuts in bold font and the BDCs sustaining their dividends in regular fonts:
The Correlation of Weighted Average portfolio yield to BDC yield and weeding out the BDCs with portfolio quirks like ACSF, FULL, KCAP, OHAI, SAR, MFIN and TICC.
The following companies had weighted average yields at or under 9%: FSFR, GBDC, PFLT and SUNS. Their average yield is 8.49%.
The following companies had weighted average yields between 9% and 10%: FSIC, MAIN and MRCC. Their average yield is 8.64%.
The following companies had weighted average yields between 10% and 11%: AINV, CMFN, FSC, GLAD, NMFC, SAR and TSLX. Their average yield is 9.9%.
The following companies had weighted average yields between 11% and 12%: ABDC, BKCC, GARS, GSBD, MCC, OFS, PNNT, SCM, TCPC and TCRD. Their average yield is 10.47%.
The following companies had weighted average yields over 12%: CPTA, FDUS, GAIN, HCAP, HRZN, HTGC, PSEC, TCAP, TICC, TPVG and WHF. Their average yield is 11.28%.
The BDCs with dividend cuts predominantly came from the BDCs with higher portfolio yields.
Disclosure: I am/we are long AINV, ARCC, FDUS, MRCC, PFLT, PNNT, TCPC.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.